Job hole or inflation? Fed authorities divided on risks

Jun 24 (.) – As Federal Reserve officials launch an intense debate about when and how to start reducing support for the economy, they are divided by what poses the greatest risk: a still large jobs deficit or a possible inflationary shock.

Robert Kaplan and James Bullard, heads of the Dallas and St. Louis Fed, respectively, warned Thursday that inflation could hold for longer than many of their colleagues might anticipate. They both believe that the Fed will have to start raising interest rates next year.

“Policy makers will have to take this new risk into account in the months and quarters to come,” Bullard told the Clayton Chamber of Commerce near St. Louis.

Kaplan, speaking to the Austin Headliners Club, said he sees “bullish risk” in his projection for inflation of 2.4% or 2.5% next year, which is already at the top of the range for Fed forecasts.

He added that the Fed should start cutting its asset purchases “sooner rather than later” to smoothly start the stimulus reduction process and avoid having to brake sharply later. Continuing with asset purchases more than necessary could also fuel excesses and imbalances in financial markets, Kaplan said.

Meanwhile, New York Fed Chairman John Williams and Philadelphia Fed Chairman Patrick Harker, speaking at separate events, emphasized how much further the labor market must advance before it recovers. Neither Harker nor Williams said when they think the Fed should start raising rates, although a majority in the central bank believe they will need to do so in 2023.

“Once the recovery is more complete and the economy is in a very good place, then we can take the low interest rates and bring them to more normal levels,” Williams said during a virtual conversation hosted by the College of Staten Island. “This is not the time now because the economy is still far from maximum employment.”

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Harker, speaking at a virtual event held by the Official Forum of Monetary and Financial Institutions, said that the economy has about 10.6 million fewer jobs compared to what it would have been if job growth had maintained its trajectory. prior to the pandemic.

Since the pandemic began last year, the Fed has faced little tension between its two terms of full employment and stable prices. Near-zero interest rates and $ 120 billion in monthly asset purchases were calibrated to do double duty, boosting hiring and what had been far too low inflation by lowering borrowing costs.

But now, with the economy reopening at a rapid pace and struggling to meet demand, consumer prices rose 5% last month, the fastest pace since 2008.

Fed Chairman Jerome Powell has argued that the increase will prove temporary, as inflation will cool as schools reopen, a decline in fears of infections will bring more Americans back into the workforce and businesses will increase. production to end supply bottlenecks. But some have their doubts.

Kaplan is targeting 2.5 million or more Americans age 55 and older who have retired since the pandemic began, and on Thursday he said it’s unclear how many will return to the workforce. That, along with 1.5 million who left their jobs to care for their families, means that despite the huge job hole, the market may be tighter than the 5.8% unemployment rate suggests, he said.

(Reporting by Ann Saphir, Jonnelle Marte and Howard Schneider, Edited in Spanish by Manuel Farías)

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